Dude, where’s my mortgage?

Will Bank Negara’s recent loan regulations herald a local credit crunch and bursting of the bubble?

Watch this Space by Chee Su-Lin | sulin.chee@thestar.com.my

These are interesting times, said a property consultant over lunch recently. The pumping of liquidity by the US, UK, Europe and Japan into their economies, and by extension into the world, by the trillions of dollars, has been on an unprecedented scale. It’s like being part of a mass global experiment, the results of which we’re not quite sure, but will surely be of massive consequences.

So far, quantitative easing seems to have worked. The US is showing positive figures and we have not seen the collapse of capitalism. The “we are the 99%”-ers have not taken over from the purported 1% Illuminati controlling the world’s wealth and economy. Nor has the US fallen off a fiscal cliff.

The Occupy movement still continues but seems to have lost momentum–Alex Wong/Getty Images/AFP

In Malaysia, we have smugly ridden out the turmoils. While the property market has frozen for several years in the UK, banks still push you credit cards here (I just picked up a cool suitcase, Ikea freebies and travel miles upon approval) and people don’t think twice about eating out on RM50 per person.

In terms of property, launches have been aplenty, and panel bankers line up to serve you. Prices in some places have doubled since 2008 and we can even now take over parts of London… Malaysia boleh!

What, me worry?

If you were to read Bank Negara’s latest Financial Stability and Payment Systems Report 2012, everything sounds hunky dory. The percentage of impaired (or non-performing) loans dropped last year to 1.5% for household loans, down from 1.8% in 2011 and 2.3% in 2010.

“Indicators of aggregate household resilience are sound with total and liquid household financial buffers remaining stable,” goes the report. “More importantly, indicators in the banking sector continue to support the sound overall credit quality of household loans from the banking system.”

All very controlled and dependable, just like our iron banking lady, Tan Sri Zeti Aziz, it seems.

Special advisor to Consumers Association of Penang (CAP) Dr Lim Mah Hui (left) and CAP president S.M. Mohamed Idris showing charts on the comparison of household debt and disposable income as well as the debt service ratio in Malaysia.

Yes, Bank Negara may have lost a bit of cool recently by admitting that profligate loans have encouraged households to accumulate excessive debt. Housing, car, credit card and personal loans have increased “at a strong pace”–12% per year over the last few years–and now represents 81% of our national income.

This is risky because if interest rates rise and the economy falters, people will lose jobs and find it difficult to pay their debts; banks then would be out of money which they owe to deposit holders or other banks.

To counter this, Bank Negara recently announced it would limit mortgage tenures to 35 years. It may also curb developer interest-bearing schemes (DIBS)–where property builders pay for buyers’ loan interests during construction. Luckily, all these are calculated moves to slow down rather than crash a vibrant property market, aren’t they?

Over the last couple of weeks, however, we’ve been hearing phrases which would not normally be mentioned crop up: bad words like “interest rates increase”, “capital flight”, and “price correction”. Do we possibly see the tide turning?

Interest rates won’t rise, or will they?

Bernanke testified in Capitol Hill recently that there is a risk that Congressional fiscal policy “will restrain economic growth over the next few quarters by more than we currently expect.”–Chip Somodevilla/Getty Images/AFP

Economy watchers have for some time placed any increase in interest rates beyond the immediate future, next year at the earliest.

Low interest rates have provided cheap and easy credit and mortgages in Malaysia have grown steadily. Last year, more than half of all household loans–56%–were for buying properties, said Bank Negara’s report. The proportion of them taking multiple loans, furthermore, had risen, “signaling a resumption in demand for housing credit for investment purposes”.

After all, advertisements tout property as a means of achieving wealth and financial freedom. Gurus tell you that if you stretch your loans out, your monthly instalments will come out lower than your rentals (“positive cash flow”), and with enough properties, you may even quit your job!

Recently however, US Federal Reserve chief, Ben Bernanke (the American Tan Sri Zeti) indicated that it might begin tapering off quantitative easing as long as labour markets continue to improve. Although he’s qualified this in several aspects, US interest rates have risen in response, making the dollar and US assets possibly attractive propositions again. Many thus anticipate funds, which had flowed into emerging markets during the financial crisis, to flow back to the US and Europe again.

Manulife Asset Management Services Bhd chief investment officer Jason Chong indeed hinted that there may be a possible mass-exit of foreign investors from the Malaysian bond, money or equity markets.

To stem this capital flight, and also to protect attendant currency falls, India and Indonesia have increased interest rates up to 2%. Bank of Canada has also said that it would “gradually normalize” borrowing costs over time as the slack in the economy disappears and inflation picks up. Brazil, meanwhile, increased rates 0.5% to battle inflation. Here in Malaysia, Standard Chartered made the recent, bold prediction that rates might increase by 0.25% as early as November.

What would be its impact? For me, it means an increase in monthly instalments of RM100 per month. Imagine if I had three mortgages and my instalments went up on all of them? If I were a professional landlord, I could now be cash flow negative with my dreams of financial freedom soured.

Another development to tighten funds would be the Basel III reforms, which require the world’s banks to have enough cash in their vaults and not to lend out too much, to avoid further banking failures. Bank Negara is confident that our banks would have no problem meeting the requirements by 2018, but it would surely mean a constraint on lending.

Already, word on the ground from property sales people goes that some banks are starting to approve only 80% loans for those already servicing another residential property loan.

Potential correction

The figures show noticeable spikes in the Malaysian House Price Index and Index of Units Launched by Price for properties priced above RM1mil from late 2010.

Investors have also started talking about a “potential correction” in the property market, that runaway property prices indicate the top of a property cycle.

“There are risks faced by Malaysian banks in relation to high household debt and a potential correction in the country’s property market, but we think there is a low likelihood of these risks playing out in the next 12 to 18 months,” said credit ratings firm Moody’s in Singapore recently.

The property life cycle, as drawn out by real estate blogger AgentDiary, postulates that Malaysia is at the top of the cycle, with characteristics including transaction price peak and the “property price never drops” rhetoric.

You wouldn’t have known it from the primary market. YTL Land & Development Bhd’s preview of its Fennel project in Sentul East, priced at RM700 per sq ft, sold out two blocks within two days.

Low Yat Group’s Tribeca project on Jalan Imbi has managed to sell at prices ranging from RM1,800 to RM2,400 per sq ft to mainly foreign buyers.

Even at stratospheric prices between RM1,800 to RM2,400 per sq ft, Low Yat Group sold almost half its apartments in its Tribeca project on Jalan Imbi. Arcoris Mont’Kiara by UEM Sunrise Bhd, meanwhile, managed to chart about 90% of sales before its show units debuted to the public. The majority of Tribeca’s units were sold to foreign buyers, from the likes of Indonesia, China and Taiwan, however, while Arcoris’ developers gave significant rebates as sales incentives.

Arcoris Mont’Kiara has seen nearly complete take-up, as packaged with significant incentives.

Property investor Michael Tan reckons that if there were to be a bubble bursting, it could happen within the next couple of years, when many projects bought during the 2010 to 2012 property bull run are completed: “Many were sold on DIBS, so buyers didn’t fork out any cash until completion, not to mention all the attractive rebates. But when the properties come on stream, many will be looking to flip or rent out, and that will be the first test: whether they can find buyers or tenants.”

In terms of housing affordability, the ratio of average house prices in Malaysia, in relation to household income, comes in at about four. In rapidly emerging markets, this is still acceptable, noted valuer Elvin Fernandez has said. However, the figure rises to six, seven or even eight in certain areas of the country, he adds, and this is similar to the ratios that were seen in American houses prices “before they crashed down towards the figure of three during the sub-prime crisis, and three is some kind of gravitational pull for house prices”.

A return to Danaharta?

Mitraland Group chairman Dato’ Johan Ariffin (left) and group CEO Chuah Theong Yee believe that regulation of the property market will benefit the industry in the long run.

Datuk Johan Ariffin, previous senior GM for Pengurusan Danaharta Nasional Bhd’s property division, and now chairman of property developer Mitraland Sdn Bhd, doesn’t believe there will be a return to the last Asian Financial Crisis however. So many loans defaulted then that the government formed Danaharta to buy them out from cash-poor banks.

“No, it’s a different landscape today,” says Johan who also sits on the board of Maybank and Sime Darby Properties. “Then, it was a currency thing, many people had overgeared and businesses had borrowed too much. Today, our banks are much stronger, they have been recapitalised and are very well run compared to 12 years ago. It would take a lot for something to affect the whole system.”

One thing’s for sure, restrictions cool buyer sentiments, such as when the 70% loan cap for the third home and net income rule were announced in 2010 and last year, respectively.

Bank Negara’s regulations may dampen sales but they will weed out speculators, says Dato’ Johan Ariffin, chairman of Mitraland Group which develops projects such as 16 Quartz in Taman Melawati, pictured.

“While it may have taken us three months to hit 60% sales in the past, today it takes us six months to do it, because your buyers come, they are interested but they can’t qualify for a loan then you have to find new buyers,” says Johan.

This means that developers must have enough funds to tie them over a delay in sales. “In our cash flow planning, we already anticipate and make provision for a longer initial sales period. This just means less speculators and more genuine buyers.”

So is everything really under control then, as Bank Negara intimates? Are we just having a controlled slowdown rather than a crash? As a property watcher said over breakfast, you never know. Just like in the late ‘90s, the Asian Financial Crisis took most of us by surprise. We are living in one of history’s largest financial experiments, though, and whether Malaysian property sees a harsh or soft ride towards fundamental values will surely be affected by its outcome… Watch this space.